Why your Home Appraisal is Low

Why your Home Appraisal is Low

Many Sellers have been faced with this problem – after going through contract and home inspection negotiations, everything is waiting on the appraisal report, and then it comes back lower than the sales price – what to do next?

First, don’t panic – this happens more frequently than you know and your Solutions agent will be able to talk you through the next steps in order to come to the best solution for everyone – Seller and Buyer alike.

While we rely on many different things falling into place on the way to a successful home sale, an appraisal has the potential to make or break such plans. The Buyer’s lender requires that the place be appraised at the purchase price, at minimum, so a low appraisal can throw a major mortgage monkey wrench into the sale.

Appraisers are responsible for providing an opinion of a home’s fair market value – sometimes this can be below what the Buyer agreed to pay.

Declining values and cautious appraisers are causing this issue to come up all the time. Appraisers are under a lot of heat these days, as inflated appraisals have been assigned a lot of the blame for creating the foreclosure crisis.

Nowadays, appraisers’ licenses and livelihoods are on the line when they say what a home is worth, so they’re understandably much more critical of every property than ever before.


First reactions

After getting the word that the Buyer’s appraisal came in below value, it’s not uncommon for a Seller to feel something akin to anger that someone thinks their home is worth even less than the already-too-low sale price – who do they think they are, anyway?

The next emotion is likely to be panic — the fear that this appraisal glitch might mess the whole sale up, along with plans for moving on to the next place.

Disappointment that things may not come out as expected and helplessness to do anything about it round out the understandable pain Sellers might feel from a lower-than-expected appraisal value.

But shifting perspective can put Sellers back in the driver’s seat.

Know your bottom line

When you get the news of a low appraisal, a Seller will naturally wonder how this will impact a deal. In this case – clarity is key.

A Seller should know what their actual bottom line is – what purchase price will and won’t work for them – and let that govern their renegotiations with the Buyer.

If the lower value is justified by the comparables, however, it’s not likely to change with another Buyer or another appraiser. The Seller will have to choose whether to take a reduced price and close the sale or leave it and hold onto their home.

Remember, the Seller is in control of deciding what they will and won’t take for their home. What’s important is which priorities matter the most: getting top dollar or getting closure and moving forward.

Review is key

It’s a good idea to review the low appraisal with your Solutions agent. If they feel like the report is faulty or missed some good, higher comps, ask them to appeal the appraisal, if possible.

If the appraisal seems all right, then listen to the Buyer’s renegotiation requests and decide what price works. It’s a hard choice to make, but it is the Seller’s choice.

If a reduced price seems unavoidable, see if you can ease the sting by changing some of the other terms, like having the Buyer take your place “as-is”, since they’re getting such a great deal.

Here are the most common reasons for a low appraisal

1. The appraiser doesn’t really investigate a neighborhood

To appraise the value of a property, appraisers rely heavily on comps, which are prices paid for similar homes sold recently. But the appraiser could select comps of homes that sold for mysteriously low prices.

Appraisers don’t normally officially inspect the comps, and so wouldn’t know if there was a mold issue, asbestos, or a nasty divorce that led to a quick below-market sale of a comparable home, which then can skew the analysis.

2. The appraiser has to increase the proximity radius

Sometimes there isn’t enough data on sales of similar homes in the area, forcing the appraiser to use comps from a nearby — and possibly less desirable — community. Ideal comps should be similar in style, size, location and view.

3. The importance of the view

Does your home have a magnificent view — or, at least, one that’s better than the comp down the street that overlooks unsightly power lines? If so, make sure your appraiser knows it. If the difference in view isn’t obvious, your home could appraise for lower than expected.

4. A finished basement

The house has a large, beautiful finished basement with a bedroom and a bathroom, which has doubled the square footage. Unfortunately, appraisers are required to use much lower value per square foot for space below ground.

5. “Extras” aren’t selling the appraiser

A pool, tennis court, and high-end landscaping are attractive features, but they frequently don’t lead to significantly higher valuation on appraisals.

When an appraiser compares two otherwise identical homes, one with the amenities and one without, the difference in their selling price is typically not nearly as much as the cost of adding these features — especially when the amenities are of better quality than is standard for the area.

For example, if you spend $200,000 to improve the landscaping, but other homes in neighborhood have spent $50,000 in landscaping, the difference in quality is not likely to appraise well. So be prepared for a lower value than expected if the property has one or more of these types of features.

6. The condo is the best in the building

Upgrades and finishes might not always boost the value. This is particularly true of co-ops and condos, where the square footage plays a major role in value.

7. The market is too hot

Home prices in the area might be increasing so quickly that the comps that sold six months ago don’t yet reflect this improvement. Appraisals, by their nature, are backward-looking. You can ask the appraiser to make a “market adjustment,” but they don’t have to do it.

8. You intentionally overpaid

There are many reasons you might overpay for a home: You might just fall in love with the place and want to make sure you get it — at any cost.

Remember, the bank is going to lend only the appraised fair market value, and not the higher price you might think it’s worth. So you’ll be left paying the difference yourself. What the appraiser says (usually) goes.

9. The appraiser is inexperienced—or just bad

Sometimes, it really does come down to a job not well done. The appraiser could be unfamiliar with the nuances of the local market or might simply rush through the job.

Unfortunately, a Buyer obtaining a mortgage has no control over the appraisal selection process — the lender is the one who orders the appraisal, either directly from an appraiser or through an appraisal management company.

You can ask your lender how it selects appraisers or if there’s a particular company it uses — then do your homework.

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Charles McDonald
Charles McDonald
Charlottesville Solutions
2013 Woodbrook Court, Charlottesville VA 22901
REALTOR® - Licensed to sell Real Estate in Virginia
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